Models of Competitive Behavior
The cost of producing a megawatt of electrical energy is a function of:
- fuel price
- generation efficiency (the rate at which potential energy in the fuel is converted to electrical energy)
- operations and maintenance costs
In addition to this, generating plant incur fixed costs including:
- plant construction costs, and
- fixed operations and maintenance costs
Assuming perfect competition, the market-based price of electricity would be based purely on the cost of producing the next megawatt of power, the so-called short-run marginal cost (SRMC). This price however might not be sufficient to cover the fixed costs of generation, and thus power market prices rarely show purely SRMC pricing. In most established power markets, generators are free to offer their generation capacity at prices of their choosing. Competition and use of financial contracts keeps these prices close to SRMC, but inevitably offers price above SRMC do occur (for example during the California energy crisis of 2001).
In the context of power system simulation, a number of techniques have been applied to simulate imperfect competition in electrical power markets:
- Cournot competition
- Bertrand competition
- Supply function equilibrium
- Residual Supply Index analysis
Various heuristics have also been applied to this problem. The aim is to provide realistic forecasts of power market prices, given the forecast supply-demand situation.
Read more about this topic: Power System Simulation
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